Why Backlog Will Matter So Much to IBM Earnings and Guidance

By Chris Lange Published Jul 20, 10:20AM EDT

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International Business Machines Corp. (NYSE: IBM) will report its second-quarter financial results Monday after the markets close. The consensus estimates from Thomson Reuters call for $3.78 in earnings per share (EPS) on $20.95 in revenue. In the same quarter of the previous year, IBM posted EPS of $4.43 and revenue of $24.36 billion.

The company recently announced that its research division and its partners had succeeded in creating the world’s first 7-nanometer (nm) computer chips. These chips are 1,400 times smaller than a single strand of human hair. According to the company, the alliance with Globalfoundries, Samsung and others achieved a scaling improvement of nearly 50% over the currently most advanced technology.

It is, perhaps, ironic that IBM had to pay Globalfoundries $1.5 billion to take ownership of Big Blue’s chip-making facilities in upstate New York. The transfer was completed just last week, and Globalfoundries now owns the IBM chip-making plants in Poughkeepsie, N.Y., and Burlington, Vt., along with 16,000 patents, IBM’s former chip customers and a 10-year contract to supply Big Blue with chips.

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The carefully followed annual BrandZ Top 100 Valuable Global Brands of 2015 put IBM at number four. IBM is the only brand with sharp erosion from last year, down 13% to $84 billion. The company has posted falling revenue, and its move into cloud computing has been poorly managed. Investors have mostly given up on its future prospects.

Not to mention, the services backlog at the last earnings report was down to $121 billion. While that is massive, it is not what it was last summer when it was $136 billion. This is still down from its peak around $140 billion. At the end of 2014, backlog totaled $128 billion.

IBM is one of the top four stocks in the Warren Buffett holdings, and he has had to remain positive on his public view of Big Blue. The reality is that Buffett’s largest technology stock investment has yet to pay off, and the investment community is seeing through the financial engineering behind the buybacks. At least IBM is looking more focused on its dividend now, and that may be enough for some investors to buy and hold for years while IBM figures out its direction.

Shares of IBM closed Friday up 0.9%, at $172.51 in a 52-week trading range of $149.52 to $196.40. Monday morning, shares were up 0.3% at $172.98. The stock has a consensus analyst price target of $160.74.

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About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.